XM, Sirius Sending a Stronger Signal

On Friday, Sirius shares fell 2 cents to close at $1.27.

Those bondholders aren't the only people coming up with a different valuation than the public market. In the restructuring plan, which Sirius hopes to complete by March 31, certain current shareholders of Sirius' common and preferred stock have agreed to spend $200 million to buy 211.7 million shares, or 22% of the company's shares outstanding. That's a per-share price of 94 cents.

No Static at All

Just as Sirius' stock price is a puzzle, so is the question of the relative valuation of Sirius and XM, whose debt exchange is slated to be completed Tuesday.

At first blush, picking between the two doesn't seem that hard. XM's operations have the head start. The company's service, which was launched in 2001, had about 350,000 subscribers at the end of December; Sirius, which debuted last summer, had about 30,000 at 2002's end.

The short-seller, however, questions the value of the head start. Is there, in fact, a first-mover advantage in the satellite radio business? Can Sirius close the subscription gap with XM? Can both XM and Sirius survive in the long run? Those questions may take years to answer.

In the meantime, Sirius' proposed restructuring would eliminate its debt, though leave it with the need to obtain more money in 2004. (The company, which needs 90% approval from its bondholders, has 75% locked up.) XM's debt restructuring -- less dilutive to current shareholders than Sirius' deal -- leaves XM with $795 million in debt, and a possible $250 million further obligation to GM. But the deal, says XM treasurer Gregory Cole, cuts the amount of cash XM will have to pay to GM over the next two years. "We're a fully funded company," says Cole.

Given the numerous assumptions anyone valuing the companies has to make, suggests Mather, each person attempting the task will come up with a different answer. To summarize the short-seller's spreadsheets, XM will have an enterprise value of about $1.5 billion on Tuesday. Depending how one values Sirius' shares, its enterprise value after restructuring is in the neighborhood of $200 million if you trust the bondholders, or $600 million if you pay more attention to the new stock purchase.

Averaging the two Sirius valuations, the short-seller doesn't believe the differential between Sirius' and XM's respective enterprise values is justified. Others, however, might say it reflects Sirius' perceived greater funding risk or XM's longer record selling its service. In other words, the resolution is still up in the air.

Click here to read a letter about this story.

>To order reprints of this article, click here: Reprints